Innovation crisis

Jon Callaghan asks how VCs can help sustain innovation during our tough economic times.

Technology VCs

Are Companies Really Getting Cheaper to Build?

Today’s Wall Street Journal says “Many Internet Start-Ups Are Telling Venture Capitalists: ‘We Don’t Need You'” (subscription required).

The article talks about a theme that’s been discussed in Silicon Valley for a while: “It’s a scenario playing out all over Silicon Valley — and one with potentially big ramifications for venture capitalists. A new generation of Internet companies — many offering online photo and blogging services or downloadable software for businesses — have been built for a fraction of the cost just a few years ago. That’s mainly due to the increasing popularity of cheap “open source” software and programming tools, as well as dramatic cost reductions in computer memory, storage and Internet bandwidth.”

I agree with this, but only to a certain point. Yes, it’s gotten cheaper to get an internet company off the ground, to get to a prototype or even beta stage with very little money. However, a couple of things haven’t changed:

1. Prototypes take a couple of months, but solid, scalable, feature rich software takes at least a year to build (often longer).

2. Even with a great product, it takes at least another year to reach a critical size audience and customers.

This means that even with free software, servers and bandwidth, you will need people to work for free for 2+ years if you want to start a company without VC money. Those people will need to be very smart and at the top of their field in order to succeed in the competitive internet software field, and most of them can’t go without a salary for 2 years. And yes, you can outsource some work, but the core design and scaling of your software as well as the critical distribution partnerships that will grow your audience can’t be outsourced. Finally, in addition to salary costs, distribution costs will be rising again as the competition for finite internet audiences heats up.

All in all, I agree it’s cheaper today to get a company to a beta stage where it can be sold to someone looking for a smart team with interesting technology, but to build a sustainable company will still require venture capital for the foreseeable future.